All bets are off for the future of energy in the United States and, indeed, the world, as the price of natural gas plummets to ever-lower values — thanks to the development of technology that can access gas and liquids trapped in hitherto inaccessible shale rocks. In 2011, shale gas accounted for a quarter of U.S. natural gas production. But this seemingly bright future may depend on a court decision (expected in June 2012) and, of course, on the outcome of the November elections.

The Economics of Natural Gas

Consider the history of natural gas prices just in the last few years. In mid-2008, the spot price (at Henry Hub) reached a peak of $13 per mcf (1,000 cubic feet, with a heat value of 1 million Btu — denoted as 1 MMBTU) — having doubled since mid-2007. Since then, the price has decreased sharply, dipping to $2 in mid-March, and it now stands at $2.30. If prices decline further, natural gas will

be cheaper than the average steam coal, which up until now has been the lowest-cost fuel on a heat basis.

How realistic is such a price path? Operators drilling for gas are also extracting large quantities of natural gas liquids (NGL) as well as crude oil. As pointed out by Richard Trzupek, the profit potential lies in these liquids, as natural gas becomes simply a byproduct. It reminds me of the situation in the early 1970s, 40 years ago, when “associated gas” was so cheap, only pennies per mcf, that it was flared at the well-head. The problem then was the lack of pipelines to convey the gas to consumers in major cities.